A Brad DeLong Smackdown of Sorts

Last week, Brad DeLong posted what he called his “Seven Cardinal Virtues Of Equitable Growth.” I (pretty much) applaud them all: manage the macroeconomy; boost public and private investment; shift from value-subtracting industries (health care administration, prisons, finance, carbon energy) to value creating sectors; create a carbon tax; more immigration; obtain more equality of opportunity in 50 years by obtaining substantial equality of result right now; a well-functioning economy will need a larger government (addressing health-care finance, pensions, education finance, research and early-stage development) relative to the private economy than the twentieth century did. But, like many of my colleagues on the center-left, Brad overlooks what I see as the key economic challenge of our time—generating broad-based wage growth.

While Brad buries the goal of equitable wage growth in the grander category of “obtaining substantial equality of result right now,” I think economists and policymakers must explicitly focus on generating broad-based wage growth when discussing income inequality. This issue must be front and center, or we will never generate the policies needed to achieve the broadly shared prosperity we all want.

Sure, the bigger government and more public investment Brad recommends would provide more and better growth and, possibly, increased economic security. Along these lines we should, of course, further socialize retirement (make Social Security more generous and provide a universal mandatory savings to supplement Social Security benefits to obtain a higher income replacement rate) and continue down the path to a strong health care system. But the failure to address wage growth is prevalent on the center-left, starting with the president.

Since wages and benefits are the predominant source of income for most families (at least in the bottom 99 percent), obtaining more equitable market outcomes necessarily means creating more equitable wage and benefit growth. It’s easy to see why efforts to obtain more equitable income results must go beyond increasing transfer income to the bottom and middle and shifting the tax burden away from those income groups. Increasingly inequitable wage growth means that the tax/transfer system will need to become increasingly progressive each year in order to obtain the desired equitable income outcomes (after-tax and transfers) that Brad correctly notes are the basis for more equitable patterns of social mobility.

Generating broad-based wage growth would require diminishing the immense leverage employers now have with nearly every type of worker, from low-wage service occupations to STEM workers to other white-collar workers. As things stand, wages and compensation (wages plus benefits) have been stagnant across the board for about ten years, including the recovery from 2002 to 2007 and the downturn since 2007. Wages were also stagnant for the entire 1979-95 period that preceded the late 1990s boom. So, the problem is longstanding and, in my view, getting deeper and more entrenched.

Addressing wage growth is not simply a matter of more human capital, as we can see by the fact that white-collar and college graduate wages and benefits have been dead in the water for ten years or so. Sure, those with more education earn more, and we should definitely expand access to higher education. Doing so, however, won’t change the fact that a greater supply of more educated workers won’t happen for a while, and when it does it might mean a faster decline of college wages and not much of a wage boost for the non-college educated workforce.

It’s great that others are starting to explicitly talk about wages. For instance, Laura D’Andrea Tyson, in a post on the New York Times Economix Blog titled ‘The Quality of Jobs: The New Normal and the Old Normal,’ notes:

“The trends of disappearing middle-income jobs, stagnating wages and growing income inequality predated the Great Recession and are likely to persist even after the labor market has fully recovered, as measured by the quantity of jobs and the unemployment rate. Without significant institutional and policy changes, supported by changes in social norms about wage inequality, the “new normal labor market” could feel a lot like the “old normal labor market” in terms of job quality for a large number of American workers.”

Also in Economix, my friend and former colleague Jared Bernstein challenges us all to focus on market outcomes (i.e. wages) rather than solely on changes to taxes and transfers as a way to generate more equitable growth:

“Consider this: when it comes to economic policy, the difference in recent years between Democrats and Republicans, or most liberals versus conservatives, is that the former are willing to alter the secondary distribution through more progressive taxes and transfers. The latter are content to leave market outcomes alone. But neither wants to alter the primary distribution. This poses a serious problem. To accept market outcomes as given, and then try to offset the structural imbalances embedded therein through tax and transfer policy alone, is a fundamentally limited strategy.”

What should we be doing to raise wage growth? Certainly we need to drive unemployment down as quickly as possible, fueling better wage growth in the middle and the bottom. Setting employment standards with a much higher minimum wage would help workers in the bottom fifth. Better enforcement and improved standards regarding overtime, wage theft, scheduling, and more mandated paid leave (sick leave, family leave, and vacation) would move us forward. Similarly, labor laws that enable those seeking collective bargaining rights to do so are essential. Are these options on the political table? Some of them are, some are not. The point, however, is that we have to put the challenge before people and shape the discussion going forward.

Excellent article… a good point at the end that unemployment needs to come down to raise wages, but that will be a problem. We will have to be bold and just raise wages. It will require a shift in understanding the economy.

jonny bakho

Wages, especially minimum wage needs to go up to create the demand that will create jobs. MinWage workers spend everything they make and create demand. However, market forces to increase wages are weak in a recession because demand for labor is weak. Call it the wage stagnation trap.

The solution is to both raise MinWage and BigG job creation by moving future spending forward into the present. Increase demand by increasing MinWage, decrease unemployment by job creation and increase market pressure to raise wages.

$7847632

Good post. Question: How does paid leave, while an admirable policy, drive wage growth? I thought fringe benefits undercut wage growth over time? A little clarity on that point would be helpful in understanding full range of policy options

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